For Financing, United Must Fly Solo

Turned down again for loan guarantees by the Air Transportation Stabilization Board, the nation's No. 2 air carrier must secure exit financing on i...
Stephen TaubJune 29, 2004

The U.S. government has rejected the third and final attempt by United Airlines to secure loan guarantees, which could delay the company’s emergence from Chapter 11 yet again.

United had hoped to use $1.1 billion in guarantees to help back the $2 billion in bankruptcy financing it had secured on the condition that the company could obtain federal assistance.

The three-member Air Transportation Stabilization Board rejected UAL’s first $1.8 billion application in 2002, citing shortcomings in the company’s business plan, according to Reuters. That rejection led to the largest airline bankruptcy in U.S. history. UAL’s second application, for $1.6 billion, was rejected on June 17, largely because the industry’s access to the capital markets had improved.

The board noted the positive steps the company has taken “since entering bankruptcy in 2002 to lower its costs, strengthen its competitive position, and improve its governance structure,” according to a letter written by ATSB executive director Michael Kestenbaum to Frederic Brace, United’s chief financial officer. “Moreover, the board believes that airline credit markets have been improving since late 2001 and 2002… increasing the likelihood of United succeeding without a loan guarantee.”

Kestenbaum added that the board will not accept any further submissions from United seeking loan guarantees.

“While we disagree with their decision, we are gratified by the ATSB’s public recognition of our progress and are already moving forward to secure the exit financing we need to take United out of bankruptcy,” the company said in a statement. “We are now holding discussions with our lenders and others to determine what an appropriate overall capital structure might be.”

United can still emerge from bankruptcy “if they come up with the right business plan and the right cost structure,” Ray Neidl, an analyst with Blaylock & Partners, told Reuters. However, the airline would probably need to cut costs further and possibly to downsize its flight schedule.